Stock options can be extremely risky. It just depends on what the investor feels comfortable with. Unlike stocks, stock options expire. The options are cheaper the closer it gets to their expiration date. So if a stock is about to take a drastic move, and investor purchases a stock option that is about to expire, they can make a great deal of money with only investing a small amount.
Finding a stock to invest in. When investing in a stock option, it is important to find a stock that is moving or will be moving. If a stock stays near the same amount that an investor buys it, it will slowly depreciate. Without movement, it can be extremely difficult to make any profit at all. By reading a stock’s charts, an investor can make an educated guess on what the stock will do next. Many of these technical indicators will help point in what direction a stock is moving. One option that an investor can do is buying a “spread.” A spread is where “calls” and “puts” are purchased. Calls are when money is made when a stock is going up and a put is when the stock is in a downtrend. This way as long as the stock moves hard in one direction, a profit is made.
Buying near expiration. If a stock is about to move quickly, an option near the expiration date can make a hefty return. This is because the stock option is so much cheaper because there is not much time left to exercise the option. Stock options are already very risky because of the time frame on them. Options that typically would cost a dollar a share might be less than ten cents. So a great move can multiply the investor’s money by an outstanding rate. Investing in higher risk options can quickly pull in over a 1,000% return. But it doesn’t give the investor much time to make money. Each day the stock doesn’t move can significantly affect their investment if they try to resell a stock option.
Investing more in a low-risk stock option. If an investor does not feel comfortable investing in a high-risk stock option, they can look for something low risk. But for them to make the same type of return as a high-risk stock option, they will have to invest more money. This is because the rate of return on a low-risk stock option is smaller. Sometimes an investor can tell a stock will be moving in a certain direction but will not know how quickly it will happen. By purchasing a stock option with a longer expiration they will have more time to wait for the stock to jump.